Honolulu City Council has introduced two bills to address the "Residential A" rate and definition. REALTOR® Schuyler “Lucky” Cole wrote an op-ed that appeared in the Honolulu Star-Advertiser May 17 explaining the bills. Below is a copy of Lucky's op-ed.
"Bill 32 would fix ‘Residential A’ flaws," by Schuyler "Lucky" Cole, Chris Lau and Randy Moore
The City Council needs to adopt Bill 32, now under consideration, and fix the unfair "Residential A" tax. Bill 32 would fix an ethical problem, shift the tax burden to the higher-end properties and raise the same amount of revenue. Residential A, as implemented in 2014, is flawed and needs amending. It lacks uniformity, is unfair and will likely be judged unconstitutional.
In 2013, the city created a new investor/second home "Residential A" tax class based solely on a property's assessed value of $1 million or more. Last June, the city applied a flat rate of $6 per $1,000 of assessed value to this class, which was much higher than the existing residential rate of $3.50 per $1,000. In so doing, the city caused an unfair tax of $2,500 for 7,000 second-home and investor owners. One investor with a property assessed at $999,999 paid $3,500 in taxes, while a second investor with a property in the same zoning and use with an assessed value of just $1 more--at $1 million--paid $6,000 in taxes. This $2,500 Residential A tax differential is arbitrary, discriminatory and placed these taxpayers at a competitive disadvantage. Some owners will recover this cost by passing it on to their tenants, e.g., $200 or more per month.
The city stated that in 2015, 1,000 more properties were assessed at or above $1 million and fell off this cliff. These taxpayers will pay $2,500 more in tax on a small increase in their assessed value unless the City Council adopts Bill 32. If the Council does nothing, 1,000 more taxpayers will have an unpleasant surprise in their July bill. Fortunately, Bill 32 is a simple solution that would raise the same amount of revenue.
Bill 32 would adopt the 2014 Real Property Tax Advisory Commission's (RPTAC) recommended solution of a graduated two-rate plan, similar to the income tax schedule. The residential rate of $3.50 would apply to the first $999,999 of assessed value for all properties in the same use and zoning. A second "Residential A" rate would apply on values above $1 million, with this rate set to be revenue neutral, e.g., $9.08 per $1,000 assessed value in 2014.
Given these two rates, the owner of a property assessed $1 higher at $1 million would pay less than a penny more in tax in 2015, instead of the $2,500 paid in 2014. The city would raise the same amount of revenue. It is uniform and fair. Bill 32 is progressive, shifting the tax burden to the very high-end taxpayer.
Most of the Residential A tax increase would move from the 5,000 taxpayers whose properties are below $1.8 million to the 2,000 taxpayers at the very high end. The graduated property tax rate is easily understood and used in other jurisdictions. In our opinion, the Star-Advertiser in its April 26 editorial did not correctly interpret the RPTAC's recommendations on Residential A and should have supported Bill 32, not opposed it ("'Residential A' bills deserve a quick death," Our View).
Bill 32 would require use of the residential rate for properties whose value is below $1 million and as a result, Bill 33 would not impact this large pool of rental units. We think Bill 33 is reasonable, but is not required to fix the harm caused by the Residential A flat rate.
The Council must adopt Bill 32 to avoid continuing an unconstitutional and unfair tax.
